The opinion of the court was delivered by: David Alan Ezra United States District Judge
ORDER: (1) AFFIRMING IN PART AND VACATING IN PART THE BANKRUPTCY COURT'S ORDER GRANTING SANCTIONS AGAINST KONOP AND (2) REMANDING THIS MATTER TO THE BANKRUPTCY COURT
Pursuant to Local Rule 7.2(d), the Court finds this matter suitable for disposition without a hearing. After reviewing Appellant Robert C. Konop's ("Konop") appeal and the supporting and opposing memoranda, the Court AFFIRMS IN PART and VACATES IN PART the Bankruptcy Court's Order Granting Sanctions Against Konop and REMANDS this matter to the Bankruptcy Court with instructions to amend the sanctions award in accordance with this Order.
I. Representations to the Bankruptcy Court On March 21, 2003, Appellee Hawaiian Airlines, Inc. ("Hawaiian Airlines") filed a voluntary petition for bankruptcy under Chapter 11. (Bk. No. 03-00817, Doc. # 1.) Konop, Hawaiian Investment Partners Group LLC, and Hawaiian Reorganization Committee LLC (collectively, "Konop and the Co-Proponents") filed a plan of reorganization for Hawaiian Airlines and multiple disclosure statements describing, among other things, the details of that plan and the means for implementing it. Hawaiian Airlines alleges that beginning in September 2004, Konop signed and filed three separate disclosure statements and various supporting documents that he knew to contain material misstatements of fact regarding the existence of financing to support his plan of reorganization. (Doc. # 64 at 3.)
First, on September 9, 2004, Konop and the Co-Proponents filed a Third Amended Plan of Reorganization. (Bk. No. 03-00817, Doc. # 3249.) They filed a disclosure statement for the Third Amended Plan on September 20, 2004. (Bk. No. 03-00817, Doc. # 3306.) The September 2004 disclosure statement stated that the plan "recapitalizes the Debtor with an immediate equity infusion of $200 million in cash, with Plan associated financial resources of more than $300 million." (Id.at 46.) It further stated in bold font that the plan sponsors "have obtained a commitment from financial institutions and accredited investors to purchase new debt to be issued by Reorganized Debtor that generates net proceeds to the Reorganized Debtor in excess of $100,000,000." (Id. at 48.) The disclosure statement also stated the following:
The Hawaiian Investment Partners Group LLC has funds and funding available, in cash, to the levels which are called for within the Plan. Proof of funds is attached herewith as Exhibit H. (Id. at 82.) However, nothing was attached as Exhibit H to the September disclosure statement.
Second, on November 11, 2004, Konop and the Co-Proponents filed a Fourth Amended Plan of Reorganization and another disclosure statement. (Bk. No. 03-00817, Docs. ## 3713, 3714.) The November disclosure statement contained the same representations as the September disclosure statement regarding the availability of funding to the levels called for within the plan. (Bk. No. 03-00817, Doc. # 3714 at 50.) However, this time an affidavit from Mr. Paul Boghosian was attached as Exhibit H. (Id. Ex. H.) That affidavit stated the following with respect to funding:
Hawaiian Air Joint Venture will make available $300,000,000 as, and for equity investment and financing, $200,000,000 will be made available for acquisition of stock in the reorganized Hawaiian Airlines, Inc. and $100,000,000 will be made available as financing for senior secured debt to be loaned to the reorganized Hawaiian Airlines Inc. I hereby affirm and declare that Hawaiian Air Joint Venture has readily available to it the funds necessary for fulfillment of the transactions set forth above with the reorganized Hawaiian Airlines, Inc. (Id.)
Third, on December 8, 2004, Konop and the Co-Proponents filed a Fifth Amended Plan of Reorganization and disclosure statement. (Bk. No. 03-00817, Docs. ## 3894, 3896.) The December disclosure statement contained the exact same representations about the availability of funds as the November 2004 statement and attached as Exhibit H the same affidavit from Boghosian. (Bk. No. 03-00817, Doc. # 3896 at 50; id. Ex. H.)
On January 13, 2005, Konop and the Co-Proponents filed another exhibit to the December 2004 disclosure statement. (Bk. No. 03-00817, Doc. # 4150.) It contained an affidavit from Dr. William H. Spencer stating that "if funds are not otherwise available, E&M will utilize the $500,000,000 United States dollars as evidenced in the attached documentation to fund the above-referenced transactions with Hawaiian Airlines, Inc." (Id.) Attached to Spencer's declaration was a copy of a document referring to an account at the "ABN-AMRO Bank" entitled "E&M Trust" with a deposit of $500 million dollars in the name of "Dr. William H. Apencer [sic] and Mr. Richard E. Warren." (Id.) The document stated that "these assets were legally obtained from non-criminal business or actions." (Id.)
On February 4, 2005, Konop and the Co-Proponents filed a declaration from Spencer further attesting to the availability of funds and commitment to finance Konop's reorganization plan. (Bk. No. 03-00817, Doc. # 4309.) Attached to that declaration was a letter from ABN-AMRO bank purporting to confirm the $500 million on deposit in the E&M Trust account. (Id.) The letter stated that "we, ABN-AMRO Bank, N.V., confirm the amount USD 500,000,000.00 (Five hundred Millions Dollars) on deposit in account number 16/00-1119 are clean, clear and free of non-criminal origin . . . ." (Id.) The letter also contained several spelling and grammatical errors. (Id.)
On March 28, 2005, the Bankruptcy Court entered an Order disapproving with prejudice Konop and the Co-Proponents' Fifth Amended Plan of Reorganization and the accompanying disclosure statement. (Bk. No. 03-00817, Doc. # 4671.) That Order states, in pertinent part, that "it appear[s] that the proponents of that proposed [Fifth Amended] Plan have no available financing to fund their Plan and have misrepresented the availability of such funding." (Id.)
Subsequently, Paul Boghosian and William Spencer were both convicted of conspiracy to commit bankruptcy fraud, and Boghosian was also convicted of one count of commercial bribery. United States v. Boghosian, et al., Case No. 05-cr-00351 (S.D.N.Y. Oct. 20, 2005).
On April 11, 2005, Joshua Gotbaum, the Chapter 11 Trustee of Hawaiian Airlines, Hawaiian Holdings, Inc., HHIC, Inc., and RC Aviation LLC (collectively, "HHI Parties") filed a motion requesting that the Bankruptcy Court hold Konop, Randal Yoshida ("Yoshida"), and Timothy Philipp ("Philipp")*fn1 in contempt of court and order them to pay sanctions for making knowing misrepresentations to the court regarding the existence of financing to support Konop's Reorganization Plan ("Sanctions Motion"). (Bk. No. 03-00817, Doc. # 4739.) On June 17, 2005, Konop filed an Opposition to the Sanctions Motion. (Bk. No. 03-00817, Doc. # 5159.) On July 22, 2005, Hawaiian Airlines filed a Reply in support of its Sanctions Motion. (Bk. No. 03-00817, Doc. # 5297.)
In support of its Sanctions Motion, Hawaiian Airlines submitted substantial amounts of evidence, including an email sent from Konop to Boghosian on November 5, 2004. In that email, Konop tells Boghosian that "your document provides no nexus between your stated intent to provide funds and the funds." (Id. Ex. D.) Konop goes on to state that Boghosian's documents provide "no 'proof of funds'" and accuses Boghosian of "putting us all on the brink of a Rule 11 action." (Id.)
On July 29, 2005, the Bankruptcy Court held the first of several hearings on the Sanctions Motion. (Bk. No. 03-00817, Doc. # 5442.) At the conclusion of oral argument, the court determined that the record supported a finding that Konop made knowing misstatements of fact. (Id. at 29.) The specific misrepresentations identified by the court were as follows.
First, the Bankruptcy Court explained that there was "that plain, bald, unconditional statement in the body of the disclosure statement that the money was there and that the truth now apparently is that there wasn't the money there." (Id. at 30:3--6 (referring to the September 2004 disclosure statement).) In reaching this conclusion, the court rejected the argument that a purported commitment from USA Capital could provide the basis for the assertion that the money was there.
[W]e had the -- the commitment from USA Capital for $60 million which isn't close to what the plan needed. Also, that commitment itself, I have to say, is a little bit suspicious. I mean, it's basically a one sentence document promising to provide $60 million without any contingencies, or conditions, or representations, or warranties. It just isn't credible and it went away, apparently. It was withdrawn for whatever it was worth to begin with. (Id. at 30:6--14).
Second, the court addressed the Boghosian affidavit and concluded that Konop himself did not believe Boghosian's statements regarding the availability of financing. The court stated as follows:
Mr. Boghosian came along and got involved and made his promises that he would make the money available, but Captain Konop's emails that he sent to Mr. Boghosian makes it pretty clear that he didn't really believe Mr. Boghosian either, that he hadn't been convinced that there was actual money behind Mr. Boghosian's promises. But, nevertheless, Captain Konop kept those concerns to himself and Mr. Boghosian certainly didn't tell the Court about it or tell any of the other creditors about it and continued to proceed as if he had the money available knowing full well that he didn't. (Id. at 30:15--25.)
Based on those factual findings, the Bankruptcy Court determined that Hawaiian Airlines had "made the case for sanctions against Captain Konop" and scheduled a conference for August 15, 2005 to address, among other things, the ...